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A one direction market

Agriculture.com Staff 02/04/2008 @ 1:10pm

Minneapolis above $14, who would have thought? Wheat prices higher than soybeans? No letup this week as Minneapolis continued to blaze into the stratosphere. Few, if any, sellers even exist for the front month hard red spring wheat futures, creating a vacuum for buyer(s) obviously under the gun.

It's extremely dangerous to be short this wheat market, Minneapolis in particular. It's barely February and stocks of spring wheat are so tight, producers are scrambling to find even seed wheat. The prospect of winter kill in the northern Plains after -25 F only exacerbates the problem as producers weigh the likelihood of replanting - preferably to spring wheat if they could.

While Minneapolis usually doesn't hold so much influence over the wheat complex, much less the entire grain complex, it is certainly the star performer this winter and I would think will continue to be this spring. While demand for all wheat is relatively inelastic, demand for the high quality hard red spring wheat is even more so.

But, plantings and production of spring wheat have steadily declined over the last several years. Northern plains producers found alternatives to spring wheat that was prone to disease issues, particularly in North Dakota, and which wasn't offering the protein premiums that made it economical in the first place. Canadian producers, too, moved away from spring wheat as other crops were more profitable and the desire to avoid the wheat board.

The astonishing thing about these price levels is that they're not rationing demand. Export sales continue to be large, with demand steadily increasing for new crop as well. Just the slightest pullback in price brings numerous buyers to the table. Yes, the buyers are balking at the price but they keep paying it.

When and how this bull market will shake out is still a huge unknown. The Northern Hemisphere's growing season is just getting under way, and there are already some red flags out there. India continues to be dry, with recent rains not adequate or in the right places to help much. While most of their wheat is irrigated, we only need look back two years when they started this bull market to know that even slight weather issues can create significant problems for the world's second largest consumer of wheat.

Here at home, even though winter wheat is dormant, there are plenty of questions regarding winter kill, and the possibility of freeing up acres in several regions- the northern Plains, central Plains and even the Midwest. There is little doubt that volatility will remain a huge part of the market well into the spring as the acreage fight enters the final rounds.

For now, I continue to think that wheat is still in a bull market and will not roll over until it actually sees what kind of crop we're going to get here in the US. We may see pullbacks, which will likely continue to be very volatile, but with so little demand rationing actually taking place the market simply cannot afford to let up until stocks are actually rebuilding and comfortable.

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Weather Trumps Demand